Block Grants—A Summary

A block grant is a proposed strategy used for managing Medicaid, which provides control of the program in state hands by placing a flat cap on federal funding. Proponents argue these locked lump sum payments would provide states greater freedom in regulating health insurance. As a result, less federal funding would be available for state Medicaid programs, which proponents argue would incentivize states to manage their finances more responsibly. However, critics counter that it is inherently challenging to “manage fiscal responsibility” for a program based on providing health care for the needy.

By turning Medicaid into a block grant-based program, states themselves would have the increased ability to decide who qualifies for coverage, rather than having to largely meet federal coverage requirements as a prerequisite for receiving federal funding. Currently, states have to meet federal requirements for coverage, such as covering children and low-income pregnant women, as a condition of receiving federal funding. Therefore, because the federal government and states share in the funding of Medicaid programs, states are restricted with how to spend federal money and what benefits to cover. Transforming Medicaid into a block grant-funded program results in loosening these state coverage requirements.

A block grant is different from a “per capita cap,” which provides fixed federal funding based on the number of enrollees in the state. By contrast, block grants do not account for this variability; if the number of enrollees shifts dramatically from year to year, federal funding through a block grant cannot account for this increased or decreased expense.

Proponents of the block grant structure for Medicaid argue it will encourage innovation by forcing states to spend their money more efficiently. However, critics argue the structure harms people in the guise of “experimentation,” by forcing states to take drastic measures to cut costs in the short term—perhaps by cutting benefits or increasing cost sharing obligations. One criticism is that these fixed federal grants would be based on national inflation, not medical inflation, which accounts for epidemics, new and expensive drugs, and an aging population. In order to account for the sudden loss of federal funding, many states may cut benefits entirely for current enrollees eligible for Medicaid in expansion states. In fact, block grant proposals likely would cut off all federal funds allocated for Medicaid expansion entirely. Given that thirty-one states and the District of Columbia have adopted Medicaid expansion, including about one hundred Republican House members and about twenty Republican senators, this drop in coverage would be problematic. Alternatively, states may decide to cap enrollment to save costs, leaving many qualified enrollees without health care coverage. The Congressional Budget Office estimates block grant proposals to cut Medicaid by as much as a third over the next ten years. This drastic of a cut would primarily affect the elderly and the disabled, who are the recipients of the clear majority of the existing Medicaid budget.